For most investors, 2022 will not end soon enough. With the bulk of the fourth quarter still in front of us, and the potential for more downside, this hardly seems like the time to get aggressive on technology. However, it is important to remember what Nathan Rothschild, a 19th-century British financier, said, “the time to buy is when there’s blood in the streets.” While the panicked capitulation selling has not hit us yet, it could be very close.
Last week’s consumer and producer price index data all but sewed up another 75-basis-point increase in early November, which will take the federal funds rate to 3.75% to 4.00%. That is starting to get close to the Federal Reserve’s terminal rate, especially if another 50-basis-points is tagged on in December. So while blood may not quite be in the streets yet, it is getting quite close.
Goldman Sachs says the way to play software now is defense in a downturn and offense in the inevitable recovery. The analysts highlighted stocks to buy for a hard and soft landing for the economy, and with much of the current data still indicating a reasonably robust economy, (one that can improve when rate increases end), we decided to focus on the soft landing ideas. The Goldman Sachs team said this when discussing software valuations now:
The average multiple compression from prior peak to trough since 2001 has been -30% which is significantly lower than the -55% peak to trough compression seen since January this year, due to a number of macroeconomic risks from inflation pressures and rising interest rates in the US and fears of a recession looming. In contrast, 2002 multiples compressed from peak to trough valuation by ~49% over ~9 months and the Global Financial Crisis in 2008 triggered a sharp -57% multiple compression over ~6 months. As part of this analysis, we also looked to identify companies who we expect to have a strong runway for long-term growth and may become more in-favor once we see signs of an economic recovery starting to take hold.
The bottom line is that we could be close to the end of the selling for the six top software stocks they like going forward. While all six are rated Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This large cap legacy technology stock has been cut in half over the past year. Adobe Systems Inc. (NASDAQ: ADBE) operates as a diversified software company worldwide. It operates through three segments.
The Digital Media segment offers products, services and solutions that enable individuals, teams and enterprises to create, publish and promote content. Its Document Cloud is a unified cloud-based document services platform. The company’s flagship product is Creative Cloud, a subscription service that allows members to access its creative products. This segment serves content creators, workers, marketers, educators, enthusiasts, communicators and consumers.
The Digital Experience segment provides an integrated platform and set of applications and services that enable brands and businesses to create, manage, execute, measure, monetize and optimize customer experiences from analytics to commerce. This segment serves marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers and executives across the C-suite.
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